Nine reasons why developers fail to secure finance quickly or at all: Holden CAPITAL
SPONSORED POST
Nine reasons why developers fail to secure finance quickly or at all
1. You expect banks/lenders to fund your project.
Whilst banks and lenders generally have clearly defined policies outlining what they can and cannot do, it is not automatic that just because your loan fits within their policy that they will fund it. This is particularly true in the current market with the volume of sound projects that we are seeing since the residential markets picked up in 2014. Lenders are being more selective and do not have to fund every project that lands on their desk, so It is imperative to present your project in the right way to motivate the lender to do the deal from the start, even after they hear about the 1 or 2 leniencies you might require or those boundaries that HCAP as your advisor are pushing to get you a better deal. Remember, approval is not automatic, we need to create a desire by the lender to be a part of your deal
2. You negotiate terms before giving the lender the chance to understand the deal.
Similarly, it is understandable that everyone wants a good deal on finance, but starting the finance discussion by asking for or even dictating the terms you want before we or the lender know anything about your project or your capabilities to deliver it, is a fast road to disappointment. Borrowers with this approach have a long road in front of them to reach their destination. Any financier/broker/real-estate-agent can over-promise and under-deliver, and for some people that matches perfectly because they just want to be told what they want to hear. Smart developers are patient and understand that by firstly explaining their motivations and background and then providing the transaction details, including all the pros and cons (and their means of dealing with them), provides us with a reason to want to do the deal. Once this is established, we are motivated to provide competitively priced terms that reflect the relevant risks and meet the required timeframes. This then allows you to get on site quickly and do what you do what you hopefully do best, develop properties. So, explain first, ask later.
3. You don’t have a genuine reason why you are doing the project.
As Henry Ford said “A business that only makes money, is a poor business”. Doing a project just because you out-bid a bunch of other developers to win it or because you own it and think it’s a good idea is not a reason of itself. Regardless of the state of the market cycle, site selection strategy differentiates the elite from the amateur developers. It is surprising how many developers base their acquisition strategy on being “friendly” with a few agents. Being close to the top of an agents speed dial list isn’t the sustainable business model a financier wants to hear. The elite developer identifies his target locations based on researching the demand supply due diligence he undertakes. They then scour the area (some literally go door to door having cups of tea) to capitalise on opportunities because to succeed they know that they need to understand the better sized lots on which to fit the best number of product per square metre of land; the neighbourhood plan and what they can push council for relaxations on; what the marketers can achieve in terms of sales rate per month from launch and all the other key issues that will ensure a viable project. Essentially, living and breathing a location and knowing where you can push and pull the boundaries to make a project to stack is the key. These smarter developers wear their ‘why’ on their sleeve and you can see it in the way they approach their business. These guys lead the market while the rest follow and some get left behind. Be strategic and have purpose if you want to be successful.
4. There are gaps in your capability to deliver the deal but “you will find a way”.
Developers who have this problem, which can be financial or capabilities, fall into two categories; those who know it and are looking for someone else to solve their problems; and those that don’t. Whilst it can be admirable to see these people invest heavily in a project, it is also a concern. Frankly, those that don’t know they have a problem often never get it and like many things in this world, you can’t change them no matter how hard you try, so best to walk away. But for those who do understand their deficiencies there can be a solution if they are willing to listen and adapt. The secret is, understanding what you can do and being prepared to let others do what you cant. It is this second part, which is the hardest because it usually means that you have to give something up and that usually comes at a cost and can be both financial and some cases, control. This is probably the hardest process to undertake and the one that most often results in costly mistakes, by all concerned. To get the deal done, all parties concerned need to understand their strengths and weakness’ and be prepared to compromise to achieve a positive result. Quite often 50% of something is better than 100% of nothing.
5. Can you control the key delivery elements of the project?
An often seen issue is the inability for developers to recognise that they don’t have all the requisite skills to complete a project “in-house”. Property development is a complex process that requires many skill sets and even the elite developers know when to hire in the right professionals to help them out. Often a developer will try and bolt on skill sets to bolster their capabilities which is great, but having someone apply their time/service on an “all care no responsibility” basis is higher risk for you as the developer and us as a lender/investor in your project. As a lender/investor, we would much rather see you try and get their interests aligned with yours. Nearly all consultants will offer their time for a fixed fee or a per month rate, but if their services are a critical part of your delivery process why not incentivise them to the end objective which is a completed and profitable project? As an example, rather than paying $10k/month for 18 months ($180k), why not $6k/month ($108k) and a $120k performance bonus payable when there are surplus sales proceeds after repayment of the project debt. This ensures that person/company is very motivated to see the overall project succeed and is tied to the ultimate goal, which is profit. If an external party is critical to the project success, try to align their interests with yours.
6. A one-page feasibility is not a “Finance Application” end of topic, just don’t do it. Ever.
7. You’re not crunching your numbers over and over and over again.
Elite property developers constantly crunch their numbers over and over again to be sure they are not missing anything. They acquire or construct their own spreadsheets that allow them to continually refine price points, costs and timeframes as they gather more and more due diligence about these elements of their deal and they never stop the process. When asked questions about these elements, they have a good grip on their base case as well as optimistic and worst case results. Those who struggle often can’t tell you their break-even point per product, their cash flow requirements from now until project settlement, or marketing aspects like cost per lead and conversion rates to unconditional presale. If you want to impress us and the lender. Know your numbers.
8. You don’t have a strategic and sustainable business model.
In addition to seeing that you have a purpose, a financier wants to see your business plan. It’s not all just about the one deal. Yes, sometimes a project is a once off because an owner decides to redevelop a site, but these are few and far between. In most cases you are intending to undertake multiple transactions and the lender wants to understand your ability to maintain sustainable flow of profitable transactions. So, what will you do for the next 18-24 months until that last apartment is sold and you have seed money again? How does your business grow? Cash is oxygen to any business and a lack of it limits growth potential. Developers often have A&L statements showing all their capital invested in two or three projects and they can’t do another project until all the stars align and they get their money back from their current workload. What they also need to see is a carefully considered group cash flow that demonstrates how you are using your capital strategically and that you can do another project within the window of the current market cycle (maybe partner with a capital provider like Queen Street Invest). Again, show you have purpose, are a sustainable player and not a one-project wonder.
9. Underprepared marketing and sales strategy.
Probably the single most common mistake we see from developers is a failure to understand the importance of and difference between marketing and sales and how to use the right resources. It doesn’t matter that you have secured the best team of professionals such as town planner, architect, builder and other technical support, if you don’t know how to tell the market about your product and you don’t have a team of skilled negotiators to secure sales, you can’t make a profit other than by accident! Time and again we see a blind faith in the reliance on local agents or ill-conceived marketing strategies that results in a failure to meet everyone’s expectations, often with catastrophic results. Remember, you don’t make a profit until the final sales are sold and settled. The secret is to do your homework and appoint professionals based on their proven expertise. As noted earlier, ensure that they are properly incentivised and that their remuneration is tied to the project profit! Don’t be afraid to spend money on marketing and sales, understand the difference, how and when to use them and why they are the key to delivering your profit.
To find out more about which option best suits your next project, contact Dan Holden at HoldenCAPITAL on 0401 669 502 or visit HoldenCAPITAL here.
